Mortgage Terminology
Interest Rate - As with all loans, there will be both a stated interest rate and an Annual Percentage Rate (APR) - The rate the lender quotes you, as a percentage of the loan balance, will determine your monthly payments. The APR is the interest rate you will actually pay when taking into account closing costs. When the APR is significantly higher than the interest rate, it probably means the settlement costs are quite high. Because the two rates and vary quite a bit, lender are now required to disclose both rates to you.
Down Payment - You will, most likely, be required to pay a portion of the purchase price up front in order to be approved for a mortgage for the remainder of the amount. The amount of money you want to put down or will be required to put down may vary depending on the type of property, your credit score, the amount of reserves you have, the loan program you choose, whether or not you will owner occupy the property, and many other factors.
Pre-payment penalty - A penalty a mortgage lender may charge if the borrower pays off the loan before a pre-determined amount of time. This can happen if a borrow sells the property or if the borrower re-finances before the pre-payment penalty has expired.
Re-finance - Just because you may be taking out a 30 year mortgage, it does not mean you will keep that mortgage for 30 years. If you situation has changed or interest rates have decrease to a point where it makes sense for you, it is possible to pay off the current mortgage and take out new one at a more advantageous rate for you. Depending on how much "equity" you have in your home, you may also be able to re-finance and take out some of the equity you have built up.
Equity - The difference between your total mortgages on a home and market or appraised value of the home. It is often possible to "pull equity out" of your home. Many lenders will allow you to re-finance, take out a Home Equity Loan (HEL) or a Home Equity Line of Credit (HELOC) in order to "pull equity out".
Home Equity Loan (HEL) - A loan taken against the equity in your home. Home equity loans are usually for a stated period of time and at a static interest rate. Home equity loans, like your mortgage, are usually tax deductible as opposed to credit cards which are not.
Home Equity Line of Credit (HELOC) - A loan taken against the equity in your home whereby the borrower can use the line, repay it and borrow against over and over for a predetermined period of time.
Closing Costs - In addition to your down payment, there are other costs associated with closing the loan that you may be expected to bring to your closing. Some common examples are:
- Attorney's fees
- Appraisal fees
- Underwriting fees
- Loan processing fees
- Loan recording fees
- Lender's Title Insurance (Borrower's title insurance is separate and optional)
- Rate lock fee
Pre-paid expenses - The borrower may be required to bring extra funds to closing to either reimburse the seller for certain costs paid in advance of closing or to pre-pay certain expenses the bank requires to be paid up front.
- When a borrower is required to either reimburse the seller for out of pocket costs that are pre-paid for a period of time that will be utilized by the buyer. For instance, the borrower will reimburse the seller at closing for property taxes paid for the remainder of the quarter that the buyer will own the property. Another common example would be condo fees paid towards the remainder of the month in which the sale is occurring.
- The lender may require certain expenses be paid in advance such as property taxes for the next quarter or for property insurance.
Seller concessions - As part of the purchase agreement, the seller may agree to pay for the borrower's closing costs, pre-paid expenses or to help the buyer get a lower interest rate.
Points - One point equals one percent (1%) of the loan amount. Borrowers, or sellers in the form of seller concessions, may opt to "pay points" up front in exchange for a lower interest rate. A borrower would more often want to do this when they know for sure they will be in the same mortgage for a pre-determined amount of time. Your Buyer agent can help you determine the payback time or how many months it would take, given the difference in monthly payments, to pay back the points paid.
Private Mortgage Insurance (PMI) - PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home's value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.